Pan African Resources bucks the trend

[miningmx.com] — PAN AFRICAN RESOURCES has been a cracking
performer over the last 12 months. The gold index has shrunk about 13% in that time,
but Pan African Resources, run by former Harmony Gold manager Jan Nelson, has
moved the other way, gaining about 61%.

In some ways, it has a business model of which Gold Fields CEO Nick Holland recently
said he was desirous for his own company’s new business strategy: small, profitable
mines. Pan African only produces 100,000 oz/year of gold, as well as 12,000 oz/year
of platinum from a surface retreatment operation, but it books profits and pays
healthy dividends.

“It’s been an extremely strong performer,’ says Daniel Sacks, portfolio manager at
Investec Asset Management, one of Pan African’s largest shareholders. He adds,
however, that he wouldn’t like it to become “the next Harmony [Gold]’, a company
that came to prominence buying unloved assets and then niftily turning them around
by cutting out yesteryear’s expansive corporate and services costs.

Harmony eventually became a 2m oz/year plus gold company before the turnaround
business model ran out of steam.

Sacks and Pan African’s other shareholders, which include Allan Gray and Coronation
Asset Managers, want Pan African to check its scale ambitions. “We are reluctant for
them to start issuing more equity; anyway, they are pretty stretched at the moment,’
says Sacks. As a result, there’s some scepticism that the strike-induced closures of
gold and platinum mines could be an opportunity for Pan African to grow.

Picking up mines from the major mining companies which may seek a broader,
offshore asset spread is part of Pan African’s growth strategy as stated in its recently
announced full-year results. “The group believes that significant opportunities will
become available in the gold and platinum sectors in SA as the major mining houses
start divesting of their SA assets to gain a more international footprint,’ the company
said. You can’t get plainer than that.

The question is whether the strike action in the platinum and gold sectors will force
the majors to divest of assets quicker than they, or Pan African anticipated. “No,’
says Nelson. “We have been told by our shareholders to bed down Evander Mines.’
Evander Mines is Pan African’s most recent acquisition and by far its most significant.
Bought for R1.5bn, the mine will see Pan African double production, but shareholders
were at first resistant to it.

“It was a real job persuading shareholders to support the bid, but the condition was
that we didn’t go on a buying spree,’ says Nelson. Already, the strain of buying
Evander means Pan African will put the brakes on the dividend this year. It will also
take on R600m in debt, financing the balance of the consideration through a R700m
rights offer, as well as some cash and accumulated profit from Evander itself.

The SA shareholders, which also include its empowerment partner, Shanduka Gold,
and the Public Investment Corporation, have underwritten the rights offer (for a
finance fee of 2% versus the 6% fee an international bank may have charged) – a
situation that’s likely to prove crucial. Nelson says that offshore funds are more than
a little leery of SA amid the discontent in the labour market.

“Two institutions in the UK sold out of the company. They had taken a view that all SA
assets had to be sold,’ says Nelson. “If we didn’t raise the money in the SA, I don’t
think we’d be able to raise the money at all,’ he says of the impending rights offer.
The scepticism has been around for the last three months, he adds.

About the ongoing labour disputes plagueing the industry, Nelson acknowledges
inflation has hit labour hard. Taxi costs to the mine increased 300% last year,
according to Nelson, which is why the relatively large wage increases (11%) were
signed last year. “We can’t pay what unions are asking, but we think we can find a
solution. It’s hard to call though; the situation is very fluid at the moment.’

– Finweek